What is a 529 plan and who benefits from it?

• A. A tax-advantaged college savings plan; benefits families saving for education with tax-free growth and withdrawals for qualified expenses.
• B. A tax-advantaged retirement plan for seniors.
• C. A healthcare savings account for medical expenses.
• D. A government grant for starting a business.

Answer: (A)

Saving for education with favorable tax treatment. A 529 plan is a tax-advantaged college savings plan. The money you contribute grows without being taxed, and when you withdraw it to pay for qualified education expenses, the withdrawals are tax-free at the federal level (and often at the state level if you meet the plan’s rules). This makes it a powerful tool for families saving for college or other eligible education costs. The account is usually opened by a parent or guardian, who controls the funds and can name or change the beneficiary if plans change. Contributions are typically after-tax, but the tax-free growth and withdrawals for qualified expenses (with potential state tax deductions or credits in some states) help the savings go further. If you withdraw for non-qualified purposes, the earnings portion is taxed and may incur a penalty. The other options describe different financial accounts that serve retirement, healthcare, or government grant purposes, not education savings with these tax advantages.